31
including IT, communications and
aerospace.
56
Also, in April 2015, Precise
Component Manufacture Limited
(PCML) agreed a capital investment with
US-based private equity group Blauvelt
Capital Partners.
INSTITUTIONAL
INVESTMENT
Pension funds, wealthy family offices
and insurance companies are likely
to take the private fund route into
investing into Precision Engineering.
Although these parties may well have
the funds to invest directly, they may
not have the expertise and time to
undertake the due diligence, actual
acquisition and specialised management
that comes with ownership of a Precision
Engineering firm.
The exit will depend on the strategy of
the fund and whether the intention is to
run the business for long term income,
or to grow it with a view to sale.
CORPORATE INVESTMENT
The trend for larger manufacturers
and engineering entities to acquire
smaller companies in their sector is
not a new phenomenon, but the recent
reinvigoration of manufacturing, with
the improving economic outlook and
particularly sectors such as automotive
and aerospace, meeting new challenges
and changing business models, there is
substantial scope for this to increase.
In some situations, the symbiotic
connection between some Precision
Engineering firms and their major
customer is so important to the
customer, that taking over the
running of the firm may make sense
in terms of protecting the knowledge
and relationship – the reality is
that, for some customers, if their
supplier went out of business, it
would present significant issues in
terms of maintaining or refurbishing
old machinery and parts; in other
situations, the specialisms offered
by a Precision Engineering company
could be used across the whole of
a manufacturer’s group companies
as an in-house department more
efficiently than as an external supplier;
or, alternatively, the quality of new
innovation provided by the Precision
Engineer is so high and gives the acquirer
such technological potential that buying
the company is a logical move.
All of these considerations point to the
increasing tendency for supply chain
integration.
Companies involved in this type of
investment include large international
players such as Siemens, Graco, Alcoa,
Rexnord and Idex Corporation and Senior.
In fact, Senior announced at the end of
the first quarter of 2015, the acquisition
of Lymington Precision Engineering
for an initial £45.8m, with a further
performance-contingent consideration
of up to £31.7m.
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ENTERPRISE INVESTMENT
SCHEMES AND VENTURE
CAPITAL TRUSTS
Government backed schemes such as
Enterprise Investment Schemes (EIS)
and Venture Capital Trusts (VCTs) are
vehicles for much smaller levels of
investment than that which is available
through private equity, institutional or
corporate players. The EIS and VCT are
attractive as they provide generous
tax reliefs to investors, which were
introduced to provide incentives to
investors to invest in small unquoted
companies, which are generally
perceived to be higher-risk investments,
although, in order to access these
benefits, investors must hold their
shares for at least 3 to 5 years and so
are effectively locked in.
In the EIS landscape, investors can put
their money into an individual company
by acquiring a shareholding which gives
them some security over the assets of
the company: A UK company can qualify
for EIS status as long as it does not
carry out certain restricted activities
(engineering and manufacturing do not
feature in the list of restricted trades)
and meets other criteria to ensure that
its size is limited.
The minimum investment is £500 worth
of shares in any one company in any
one tax year, although in practice, this
minimum is set by the EIS itself and
might typically be £5000 to £10,000.
Returns can vary considerably, with
targets often high, taking into account
the potential for small and sometimes
young companies, to grow rapidly.
It is also possible to increase
diversification by investing in an EIS
fund, which is an arrangement by which
investors can spread their investment
through a number of EIS companies.
This structure does not have a legal
personality and can be a number of
parallel investment management
agreements between individual
investors and the manager of the ‘fund’
or a series of separate portfolios which
together are referred to as the ‘fund’.
The investment manager will then
commit a portion of each investor’s cash
into each investment in a qualifying
company (in line with the investment
management agreement).
EIS funds are exempt from the
Collective Investment Scheme
regulations, but some activities of
running an EIS fund are monitored
and controlled by regulatory bodies as
they are caught under the EU Markets
in Financial Instruments Directive.
Nevertheless, the constitutions of the
underlying companies are often drafted
to give full control to the product
provider in terms of management.
Unlike EIS, VCTs are subject
to regulations which have the
diversification benefit of restricting
investment in any one company to
no more than 15% by value of the
VCT’s total investments, although this
may have the disadvantage of not
allowing the VCT to take full control of
a potentially lucrative company. Also,
unlike EIS, a VCT must be quoted and its
shares, (but not those of the investee
companies) are listed on the London
Stock Exchange.
“Conventional wisdom suggests
they should account for no more
than 10% of an equity portfolio.
It is difficult to access the capital
invested in the short term…”
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Hargreaves Lansdowne on VCTs
“Specialist manufacturers such as PCML are enjoying strong demand and healthy growth,
making them attractive targets for investment.”
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Andy Denny, Bauvelt Capital Partners
